A Central Planning Ministry

Everyone now swears by the Common Minimum Programme (CMP). Let me therefore give you two quotes from the CMP. First, “the UPA governmen...

Everyone now swears by the Common Minimum Programme (CMP). Let me therefore give you two quotes from the CMP. First, “the UPA government will set up a National Manufacturing Competitiveness Council to provide a continuing forum for policy dialogue to energise and sustain the growth of manufacturing industry like food processing, textiles and garments, engineering, consumer goods, pharmaceuticals, capital goods, leather, and IT hardware.” For the moment, let’s ignore the question of how this Council will energise and sustain growth of Indian manufacturing. Let’s also ignore the point about comparative advantage, identified today, not necessarily being relevant in the future. Since there is an indicative list of industries to be energised and sustained, there is a suggestion that these are sectors where India possesses comparative advantage and notice that pharmaceuticals feature in the list. IT, BT (biotechnology) and pharmaceuticals are the buzzwords. Now, the second quote from the CMP. “The UPA government will take effective and strong measures to control the price hike of essential commodities. Provisions to deal with speculators, hoarders and black-marketeers under the Essential Commodities Act will not be diluted in any way.”

The Essential Commodities Act (ECA) of 1955 has doubtful utility. What was “essential” in 1955 is not necessarily essential in 2004. Indeed, the best antidote to price rise is competition and removal of licensing. Instead, historically, we did something like the following. Have licensing, so that there are shortages. If there are shortages, prices will rise. And price increases hurt the poor. True, hypothetically, you can identify the poor and the government can offer them subsidised goods and services. However, we know we will never be able to target delivery. Besides, in a poor country like India, everyone is poor. Therefore, confronted with possible price increases, introduce price controls. For a brief while, in the 1990s, we overcame the mindset and realised the virtues of competition. There was even irresponsible talk of actually scrapping the ECA. But as you can see from the CMP, the ECA can’t be diluted.

If you noticed and read that quote from the CMP, you probably thought it was a reference to agricultural products. Not quite. Section 2 of ECA mentions specific manufactured products, including drugs; Section 3 allows anything to be decreed essential. It is under Section 3 that we have the Drug Price Control Order (DPCO) in its present 1995 version.

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And we also have the National Pharmaceutical Pricing Authority (NPPA) which can not only prescribe prices of controlled bulk drugs and formulations, but also monitor prices of decontrolled drugs and recover overcharged amounts from manufacturers. Controlled drugs are those where sales volumes are large and market structures are such that a large number of producers don’t exist, for raw materials or for finished products. In 1979, 347 drugs were under price control. The number dropped to 142 in 1987, 76 in 1992 and 74 in 2001. And there was a proposal to slash it even further. But we now have a problem. Reportedly, there is a tussle between the health ministry and ministry of chemicals and fertilisers. Health ministry has read only that first quote from the CMP and thinks its job is to give the pharmaceutical sector a push. Price control is a deterrent to investments. Thus, following the train of thought that led to a decrease in the number of conrolled drugs, it wants a further reduction, forgetting that its job is to ensure health access, not further the pecuniary interest of Indian manufacturers. With NPPA under its wing, chemicals and fertilisers rightly recognises that the second quote from the CMP, about ECA, is vital. The number of drugs under price control must go up, not down. Perhaps up to 347 again. Notice there is some subjectivity in identifying what is essential. In something as serious as health care, every drug is essential in some situation or the other. Better bring all 500 commonly used bulk drugs under price control. That increases transparency.

India’s track record in health, judged, let us say, by progress towards the Millennium Development Goals, is pathetic. And we also know that thanks to abdication by the state and increased privatisation, medical costs have increased in the 1990s. So we should look beyond NPPA and drug prices. For instance, drugs are generally irrelevant in preventive health care, barring perhaps immunisation. Therefore, NPPA’s mandate should be broadened and we should have price controls for sanitation, sewage treatment, drinking water, even food. In preventive health care, not more than 15 per cent of costs are due to drugs. The rest is doctors’ fees, salaries, equipment costs, administrative costs. Let’s bring all these under price controls also.

There is a slight problem, but that can be handled. Deterred by price controls, Indian manufacturers will stop production. Remember that a single price-controlled bulk drug translates into price controls for several formulations. So these people will switch from controlled and essential drugs to non-essential drugs. And if non-essential drugs are also brought under price control, they will switch to cosmetics. They will relocate production to China and Bangladesh and required drugs will have to be imported. Unfortunately, because cost information is required, DPCO can’t determine prices for imported drugs based on return to capital or net worth, although maximum sale prices can still be suggested. But if we resort to imports, there are two possible problems. First, if import prices are perceived to be unreasonable, foreign manufacturers will simply not sell to India. Second, having driven out domestic manufacturing, we will ensure profits for western MNCs. But the problem can be handled. The trick to successful central planning is not only to control prices, but to control everything, including production and all resource allocation. The DPCO does have a precedent that goes beyond price controls. Section 6 allows NPPA to instruct manufacturers to sell prescribed quantities to other manufacturers. Let’s tighten this and apply it to production also. For instance, a company will only be registered in India if a certain minimum percentage of its turnover comes from manufacturing Vitamin A. Imagine what will happen to the Vitamin A market if Infosys, Reliance and Hero Honda are mandated to get into such production. The answer lies in the chemicals and fertiliser ministry taking over the proposed National Manufacturing Competitiveness Council and moving beyond to become a Ministry for Central Planning.